'Pressure to act': Why we might get the next wave of tax cuts ahead of schedule

Here's why Australia could get another wave of tax cuts as soon as next year. (Source: Getty)

Australians are seeing a bit more money in their hip pockets this year thanks to the $158 billion tax sweeteners legislated by the Morrison government.

Around 10 million Australians will receive some tax relief this tax season of up to $1,080 depending on how much you earn.

• 2019 tax cuts: Confirmed: 4.5 million Aussies will get $1,080 back – how to get yours

• FYI: This is why you might never get that $1,080 tax cut

• Brush up: Everything you need to know about lodging your 2019 tax return

That’s stage one of the tax cuts. Stage two will see the 19 per cent tax rate be expanded to include those earning up to $45,000 rather than $41,000, and will see the tax offset raised from $445 to $645. This stage is scheduled for 2022-23.

But if things play out a certain way, we could see that money earlier than planned.

Investment giant Morgan Stanley has speculated that this stage will be pushed ahead, and that we’ll see the cuts brought forward to next year.

“We think that further RBA rate cuts will put more pressure on the government to act, and we expect that it will bring forward Stage Two of its legislated tax plan to mid-2020, likely as part of the 2020-21 Budget in May,” Morgan Stanley analysts wrote in a note.

“This tax cut would be more than three times the size of the current Stage One, returning $22 billion to the household sector in the 2021 financial year and representing a 1.5 per cent boost to aggregate household income (or equivalent to the cash flow impact of 150bps of interest rate cuts).”

Cash rate at 0.5 per cent by year’s end; further cuts in November, December

The analysts also predicted that Australia would have a cash rate of 0.5 per cent by the end of the year, earmarking the end of the year for another set of cuts.

“While it is difficult to be precise on the timing of cuts, we think November makes sense as the month of the next rate cut, allowing some post-stimulus data to come through and the RBA to have another refresh of its forecasts,” they wrote.

“After that, we think it is quite likely the RBA will move quickly to implement a second cut, similar to their June/July move earlier in the year.

“The data are likely to justify another cut and we think the RBA would like to get ahead of the market pricing and also the most important seasonal period for the consumer.

“Because of this, we expect back-to-back rate cuts in November and December, leaving the cash rate at 0.5 per cent by the end of the year.”

CommSec economist Craig James also tipped November for another cut, as well as 35 per cent of Finder experts.

While growth remains subdued and the RBA cuts rates further, the government will be “spurred into action” by the time the next federal budget rolls around, the Morgan Stanley analysts said.

“Come May next year the Federal Government will be in a position to change the narrative and say ‘let’s bring forward the tax cuts’. That’s our thesis,” Morgan Stanley head of wealth management research Nathan Lim told News Corp.

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